Exempt Employee Can't Collect Damages in Dispute over Work Hours - SHRM

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​An exempt employee who entered into an agreement with her employer to reduce her salary and hours was not entitled to damages when her hours increased but her salary did not, a California appeals court ruled.

The worker—who was paid all of her salary—could not collect additional wages under a breach of contract theory, the court said. 

The employer, an advertising agency, hired her in 2008 as an associate media director to oversee the media planning for its clients. The employer offered her an annual salary of $135,000 as a full-time employee working a standard 40-hour week. The employer classified her as exempt under California wage and hour laws. 

Prompted by a downturn in revenue and clients, the employer approached the employee in late 2012 and proposed to change her employment status from full time to part time. The parties then entered into a reduced work hour arrangement, under which the employee was to be paid $110,250—representing 75 percent of her previous salary—for working 30 hours a week. The employee was still classified as exempt from overtime pay. 

The parties followed the reduced work schedule from March 2013 through May 2014, when the employee took a medical leave of absence. Upon her return to work in July 2014, the 30-hour workweek increased; by Aug. 1, 2014, the employee was working 40- to 50-hour weeks without additional compensation. This was due to turnover in the media department and more accounts to service. 

In September 2014, and several times after that, the employee complained to management that her hours exceeded the 30-hour limit in the agreement, but no changes were made. On Nov. 24, 2015, the employee resigned. 

In August 2016, the employee filed an action with the California Labor Commissioner seeking unpaid wages. The Labor Commissioner determined that the employer properly classified the employee as exempt under the administrative exemption pursuant to California law. However, the commissioner awarded the employee unpaid wages for all the time she worked above 30 hours a week. 

The employer challenged the award in court, and the trial court determined that the employee was properly classified as exempt from overtime but that she was entitled to damages for breach of the employment contract. 

The trial court ruled that although the parties had agreed that the employee would work a part-time, 30-hour workweek in exchange for a 25 percent reduction in pay, the employer knowingly required the employee to consistently work more than 30 hours without any additional compensation.

Therefore, the trial court said, the employer breached the agreement and the employee was entitled to her hourly rate of pay for all hours worked over 30 a week. 

The employer appealed, and the appellate court reversed the lower court's decision.

Breach of Contract Claim

The appellate court first noted that, under California law, an employee is deemed an exempt employee if she is paid on a salary basis and meets the duties test for one of the statutory exemptions. An exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. 

The parties agreed that the employee was exempt under the administrative exemption, the court noted, and the trial court held that the employer properly paid the employee for all hours worked under California labor laws.

Notwithstanding the trial court's classification of the employee as exempt, however, it went on to award her compensation for every hour she worked above 30 per week based on an hourly wage calculated by the court under a breach of contract theory. This was an error, the appeals court said.
Looking at the clear language of the agreement, the employee failed to demonstrate the employer's breach, the appeals court said. 

The agreement stated that the employee was to work 30 hours a week. In a separate section, it listed her salary as $110,250. What it did not do, the court said, was tie one concept to the other. In other words, the court noted, her salary was intended to compensate her completely and was not tied to actual hours worked. 

The employee failed to demonstrate how the employer breached the agreement because she admitted it paid all her salary and failed to point to a contractual provision allowing her to claim overtime pay for hours worked in excess of 30, the court concluded. Just as the employer would not be permitted to reduce the employee's salary if she worked fewer than 30 hours in a given week, the worker—as an exempt, salaried employee—was not entitled to additional compensation for time worked above 30 hours, the court said.

Cooper v. Gallegos, Calif. Ct. App., No. G058597 (Jan. 25, 2021).

Professional Pointer: This case is distinguishable from other, more typical wage cases, which often involve a challenge to an employee's classification. Here, the employee's classification was not at issue—the parties agreed she was an exempt employee and due a certain salary regardless of the number of hours worked.

Joanne Deschenaux, J.D., is a freelance writer in Annapolis, Md. 

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Exempt Employee Can't Collect Damages in Dispute over Work Hours - SHRM
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